A Turkish multinational company TRAM has the following YTL and USD cash flows over the next 3 years:

Currency t=1 t=2 t=3

YTL 10 15 20

USD 5 6 7

The following zero coupon risk free rates prevail in both countries:

Currency r1 r2 r3

YTL 15% 14% 12%

USD 4% 5% 6%

The companys beta with respect to the market portfolio is 1.2. The market portfolio has constant expected returns over the next 3 years of 16% in YTL terms? The spot exchange rate is 1.36 YTL/USD.

TRAMs BoD has hired you to figure out how much are the companys cash flows worth today? You will present your report to TRAMs Board of Directors

Solution: